By Kira Nickerson M&G has been best known as one of the original value investors, with an emphasi...
By Kira Nickerson
M&G has been best known as one of the original value investors, with an emphasis on buying into high yielding stocks. The outperformance of its funds across the board drew intermediary attention in the 1970s and 1980s and its aggressive advertising campaigns gave it a name recognition other investment groups lacked at the time.
With a long history in the UK, it was the first group to launch unit trusts, with its core fund range featuring relatively low charges and a reputation as a safe and reliable company, M&G fell from its pedestal in the early to mid 1990s as the performance of its funds fell off.
To many, M&G became a victim of its own success. The funds grew large and the investment style became stagnant and rigid at a time in the early 1990s when growth investing was taking off.
While the group has taken some knocks, the resurgence, in performance terms, of some of its funds over the past few years is garnering investor and IFA interest once more.
Funds such as the £318m M&G British Opportunities have outperformed over three months, one year and three years to 25 April. British Opportunities is ranked 12 out of 241 funds in the UK All Companies sector over three years, eight out of 291 funds over one year and is placed 14 out of 302 funds over three months to 25 April.
The message that the more flexible investment process the group has adopted is getting through, and the launch of a new range of thematic funds, is indicative of the change in style the group has undergone over the past few years.
Launching funds such as M&G Innovator, Global Technology, Media and Communications, Global Basics, Financials and European Technology is a deviation from the old image of a value-oriented company but chief investment officer Vivian Bazalgette believes there is still some way to go before the old perception of M&G is reconciled with the reality of the group today.
As CIO do you also manage any individual portfolios?
No, fund management is a full time job. At M&G we want fund managers to devote 100% of their time and attention to fund management. I don't see how one can be a chief investment officer and run a portfolio without something suffering, as both are full-time positions.
There is also a danger that senior fund managers may get sidetracked in trying to run the business. They shouldn't because this is a very different skill set. People who have started as fund managers don't usually make it as businessmen.
M&G has changed over the past few years. We have fundamentally redefined the investment process. While we still believe valuations are important, we felt it was also important to inject an element of quality into the process. But the changes extend to more than just that, there has also been a generational change at the company. Through these changes we are now starting to see some strong investment performance come through.
Everyone is familiar with assessing price using traditional valuation techniques such as P/Es and the less traditional EV/EBITDA and ROEs. These are tools the whole investment community uses but there is no common language on quality. Our goal was to get our fund managers talking a common language so they can draw on each others ideas. Our assessment of the quality of companies is a unique internal language.
As an example, we have identified 10 key qualities we are looking for in a company. While individually these qualities look obvious, together the combination is strong. We look, for example, at whether the company's sales are growing; is it in a growing industry; does it have a strong market share; does it have strong management; and does it generate consistently high margins. We score every stock we look at on this basis and play off the quality on the price we are paying.
For the 10 criteria the stock gets either a tick or a cross which then gives the company a score out of 10. While we remain sensitive to combinations of the qualities, we tend not to look at companies which are below four or five. This excludes companies that may look cheap and are only on a high yield because the market recognises they are on a decline.
We apply this process to the top 350 companies in the UK, the top 300 in Europe and the leading 125 companies in the global index. This then gives us the framework to compare stocks internationally.
If we are looking at a UK stock through this, we can look at it in the global framework: is this stock capable of competing with the best across the world?
When we need to but at least twice yearly when their results are published. We have allocated responsibility for this to Jane Garrison as head of global research. It is her responsibility to own the quality of the research. The fund managers, as researchers, have responsibility for individual sectors. Fund managers should be in a position to know, sector by sector, what the best stocks are.
Individual portfolios are reviewed every month and sectors are covered on a weekly basis. We divide our teams by growth funds, income funds, smaller companies, global and pan-European and these teams discuss news and views every day. What builds up are interlocking peer review sessions, which in turn encourage friendly challenges among managers.
There is no formula and we believe in 100% accountability and responsibility for the funds they run.
Arbitrary restrictions give the impression that their freedom is impinged upon and this can lead to lack of job satisfaction. At the same time, though, we have to ensure the fund is doing what it says it is. For that reason, we have developed a series of blue print guidelines which the fund managers themselves help to decide. Together they come up with a set of disciplines for each fund, concerning things such as number of stocks for the portfolio, fund deviations from the index and tracking errors.
The fund manager has been involved in creating that discipline and knows not to step beyond the electric fence of the guidelines but at the same time the manager has the freedom to bring their own individual flair to the fund.
The manager can apply to do that and the request may be granted or denied. For example, in this market they may want to get adequate diversification and up the number of stocks they can hold. If it is allowed, the process change is clearly documented so everybody knows the direction the fund is taking.
When I arrived five years ago, the average age on the fund management team was probably north of 40 and it is now about a decade lower, although I personally have not contributed to this. This shift is important in that the markets are looking different today, especially with technology.
We have made a number of new recruits in the past six months alone, with Marjan Daeipour and Aled Smith joining from JP Morgan, David Jane joining from Axa, Phil Pearson from PDFM and Giles Worthington coming from Invesco. We have also been successful in our recruitment of graduates. Because there is a lot of competition for graduates in this field, we have looked at individuals with other professional backgrounds, such as accountancy or MBAs, who are interested in investment.
I really don't believe so. M&G has always been known as an innovator. In 1931 it launched the first unit trust, more recently it launched the first no load fund, the first corporate bond fund and the first higher yielding corporate bond fund.
There is uncertainty in the minds of some but long-term charts of markets show that setbacks such as in 1987 and even 1994 were really buying opportunities. The medium-term volatility in the markets today is an opportunity to buy into the concepts you believe in.
My belief is that sectors are here to stay. The enduring trends of today, broadly speaking, are demographic changes, which emphasises savings for retirement and healthcare in old age, and technological change, which we see in technology, media and communications. I understand how people feel at the moment but the purpose of sector funds is not to allocate 100% of their money into any one idea. This is a range of themes that compliment each other, which is a better way of cutting the cake than by geographical markets because you can pick off the faster growing areas.
We remain in control of our destiny but we have had the resources to hire the talent we have talked about. The group is structured to allow M&G to bring to fruition its long-term investment plans and helped to improve systems and business processes and take our reputation for service to a new level. For example, we have introduced IFA Direct for IFAs who were conscious of time constraints and therefore preferred a regular phone service to personal visits. Improvements like these take resources.
We are getting to the stage where perception is catching up with reality. The improvement in performance by our equity funds is helping this. In UK equities, eight out of 10 of our active funds were above average, and in overall performance terms, we were ranked five out of 40 groups on a weighted performance basis for 2000. Interest from intermediaries in our funds has also been across the board.
We want to complete the global theme range, we want to establish the recently launched funds but above all we want to consolidate the gains in performance we have achieved and ensure that the perception/reality gap of M&G closes completely.
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